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Diamond-in-the-rough Proposals on China

Trade is topical on Capitol Hill, where hearings on the Central American Free Trade Agreement and confirmation of the president’s new U.S. Trade Representative, former Rep. Rob Portman, Ohio Republican, have been under way.

But when trade is the subject, China is the elephant in the room. And trade critics smell an opportunity to force the administration to clean up after the beast.

Since CAFTA is presumed a few dozen votes shy of House passage, the president must be open to negotiating. And Mr. Portman’s recent testimony he would get tough with China shows he knows what his former colleagues have in mind.

Indeed there are important trade issues over which the United States must be more assertive with China. Intellectual property rights enforcement, liberalization of China’s barriers to services trade, and government subsidization of industries come to mind. But Congress is simply losing its cool over China.

Recently the Senate voted against scrapping a ludicrous proposal to hit Chinese imports with an across-the-board tariff of 271/2 percent if the Chinese government refuses to revalue its currency. While the proposal is not yet law, its consideration provides insight into the Senate’s combative state of mind.

Another recent proposal calls for appointing an enforcement czar in the office of the U.S. Trade Representative to facilitate the execution of trade complaints at the World Trade Organization. Yet another proposes the immediate revocation of China’s “Normal Trade Relations” status, which would, among other things, subject China’s products to tariff rates reserved for unfriendly nations. Whoa, Nellie.

None of those ideas reflects rational analysis. They are reactionary, needlessly provocative, economically dangerous, and would invite international condemnation as unilateral and contrary to U.S. trade obligations.

But there is one proposal floating around that has both economic merit and international sanction. Its adoption could help break the impasse between the administration and Congress on trade matters without breaking international rules or U.S. relations with China. It could even facilitate market reform in China.

Originally introduced in the last Congress as the “Stopping Overseas Subsidies Act,” the purpose of the bill is to expressly permit using the U.S. countervailing duty (CVD) law in cases involving China. Pursuant to an administrative decision upheld by the courts in the 1980s, the CVD law has been ruled unusable against so-called nonmarket economies. The decision’s rationale was that it is impossible to measure subsidies in an economy where prices are not market-based. China’s economy has evolved considerably since then. But unfair government subsidization, in its various forms, has been identified as a major problem infecting the trade relationship.

The CVD law is an essential component of trade liberalization. If people and industries are to have faith in freer trade, countries must play by the same rules to the extent practicable. And if competition is to determine outcomes, government subsidization must be discouraged and redressed. The CVD law is designed with that objective in mind, and should be applicable in cases involving China.

Imposing duties to countervail subsidies not only provides relief to ill-affected domestic industries. It also provides a concrete, fiduciary incentive to stop the subsidization, as the cost of the subsidy is transferred from U.S. to Chinese industries. In this sense, the CVD law could encourage continued Chinese market reforms in ways belligerence and grandstanding cannot.

Without recourse to the countervailing duty law, U.S. industries have turned increasingly to the antidumping law in recent years to thwart Chinese imports. Between January 2001 and December 2004, U.S. industries launched 32 antidumping investigations against China, almost threefold those against the next most frequent target in this period.

Duties in Chinese antidumping cases, although significantly higher on average than duties in cases involving other countries, provide no incentive to reform any alleged unfair pricing practices: They are based on figures over which Chinese exporters have no control — namely input prices in third country markets. It is virtually impossible to figure how not to dump in Chinese cases without ceasing exportation altogether because the methodology for calculating dumping bears no relation to commercial reality.

And for that, China rightly views U.S. antidumping laws as unfair, and is thus less enthusiastic about honoring its own obligations. The Chinese government has even linked improved enforcement of intellectual property rights laws to U.S. antidumping reform.

Allowing U.S. industries recourse under the CVD law would provide relief from the effects of subsidized competition, would encourage Chinese reform of subsidy practices, could help reduce antidumping abuse, which in turn, could provide greater incentive for Chinese improvement on intellectual property rights enforcement. It remains to be seen if Congress can keep its composure and produce a win-win outcome.